As Pakistan prepares its budget for the fiscal year 2026-27, the economy is grappling with rising global uncertainties and persistent domestic inflationary pressures. Senior economist and former federal finance minister Dr Hafiz Ahmed Pasha provided a thorough analysis of the economic challenges during a recent appearance on a morning news program, outlining the key factors likely to influence the upcoming budget.
Dr Pasha emphasized that external shocks, particularly geopolitical tensions such as the US-Iran conflict and disruptions around the Strait of Hormuz, have significantly impacted global energy markets. These developments have directly affected Pakistan’s economy by driving up international oil prices and creating supply uncertainties, which have, in turn, fueled domestic inflation.
In response to the fuel crisis, the government increased petroleum prices by approximately 40%, a move that escalated transportation costs and intensified inflationary pressures across various sectors. Consequently, inflation surged to 11.7% year-on-year in May 2026, far exceeding the State Bank of Pakistan’s target range of 5% to 7%. Dr Pasha noted that the rise in fuel prices has had a ripple effect, particularly impacting food and transport expenses.
Looking ahead to the budget, Dr Pasha highlighted the difficult task policymakers face in balancing IMF obligations with the need to provide relief to the public. He advocated for targeted interventions to alleviate the burden on vulnerable populations. A major recommendation was to reconsider the petroleum levy, currently set at Rs102.17 per litre for petrol and Rs58 per litre for high-speed diesel. He argued that this levy significantly contributes to the cost of living, especially for low-income groups, and suggested its reduction in light of rising poverty and inflation.
Additionally, Dr Pasha stressed the importance of strengthening poverty alleviation programs such as the Benazir Income Support Programme (BISP). He mentioned the IMF’s recommendation to increase quarterly assistance from Rs14,500 to Rs20,000 to better support the poorest households against inflationary pressures.
Another critical area Dr Pasha identified was the need to boost development spending, particularly in the water sector. He linked this to regional challenges, including India’s suspension of the Indus Waters Treaty, warning that Pakistan must invest in water conservation and storage infrastructure to mitigate potential future disruptions. “We have to conserve as much water as possible because further uncertainties cannot be ruled out,” he stated.
On fiscal matters, Dr Pasha acknowledged Pakistan’s progress in reducing its budget deficit, which has narrowed from 6–8% in previous years to a projected 3.5% this year, marking the lowest level in 21 years. He also pointed to improvements in tax collection, with the tax-to-GDP ratio rising to between 10% and 12%, and the Federal Board of Revenue (FBR) showing stronger performance in income tax collection during FY2024–25.
However, he cautioned that the tax system remains heavily reliant on indirect taxes, which constitute about 60% of total revenue and place a disproportionate burden on consumers. Dr Pasha advocated for a gradual shift toward income tax as the primary revenue source.
He further called for expanding the tax base by formalizing key sectors such as traders, property owners, and large agricultural landlords, who currently face relatively low taxation. Dr Pasha also expressed skepticism about the FBR’s ambitious Rs15 trillion revenue target for the current fiscal year, noting that revenue growth is closely tied to overall economic performance and global conditions.
“Revenue growth depends significantly on global economic developments, and this must be taken into account when engaging with the IMF,” he remarked. Despite these challenges, Dr Pasha maintained a cautiously optimistic outlook, suggesting that with structural reforms and prudent fiscal management, Pakistan could stabilize its economic trajectory in the coming year.
